Frequently Asked Questions
Accounting is something that every business has to deal with, and it can be hard to understand why it’s important to keep high quality books when it seems like low-maintenance accounting will do. In addition to creating visibility into your business, high-quality accounting will provide you an avenue through which to analyze data like profit margins and COGS percentage, as well as prepare you for scaling, selling, or approaching investors.
No, Seller Accountant is not a CPA firm and do not provide tax services.
We offer investor-grade bookkeeping and CFO services and can help you prepare your accounting for tax season.
To read more about taxes and tax prep, check out the blog:
Preparing Your E-Commerce Books for Tax Season
What the difference between an accountant and a CPA?
Do you need a CPA to do your small business accounting?
How does collecting sales tax factor into my yearly tax filing?
Cost of Goods Sold, or COGS, is a metric that accounts for a business’s direct cost of producing products. The formula for calculating COGS is: Factory Price + (Avg. Unit Cost of Duties, Tariffs, & Freight) = Total Landed COGS
Read more about COGS on the blog:
How to Calculate COGS for Your Amazon Business [WITH VIDEO]
Which categories count as COGS?
How do I know if my COGS are wrong?
When balancing your books, you may occasionally need to create a journal entry, a manual entry accounting for funds not otherwise imported by software such as A2X. Journal entries help keep your accounting balanced and your funds accounted for.
Read more about Quickbooks journal entries on the blog:
Creating a Journal Entry in Quickbooks Online [WITH VIDEO]
How to Create a Journal Entry in Quickbooks
Your relationship with your accountant is one of the most important you’ll have in running your business. It involves a high level of trust, both in their bookkeeping skills and their personal integrity.
If you’re feeling like your accountant may not be a good fit, ask yourself the following questions:
- Does my accountant understand the unique circumstances and challenges of running an e-commerce business?
- Does my accountant have expertise in areas that are important to me (accrual bookkeeping vs. tax filing vs. payroll, etc.)?
- Does my accountant respect the amount and type of communication I prefer?
If your answer to any of these questions is “no,” it might be time to consider how you can better communicate your needs – or to change up your accounting partner.
Depending on the product you sell, different sales trend analyses work better for different niches. Evergreen products, such as personal care and supplements, tend to stay consistent sales-wise throughout the year, so a month-to-month analysis is appropriate. Seasonal products, like Christmas decorations or outdoor sports equipment, would benefit from a year-over-year trend analysis that can compare peak seasons.
We recommend investing in a sales dashboard – like SellerLabs, Helium 10, ManageByStats, or Teikametrics – that can separate your earnings by sales channel and that you can easily access every day.
Read more about analyzing sales trends on the blog:
How and When to Analyze Your Sales Trends
FBA, or “Fulfilled By Amazon,” is Amazon’s warehouse fulfillment program, available to Amazon sellers for an additional list of fees.
In our 2019 aggregate seller study, the average Amazon seller spent approximately 17.7% of their net sales on FBA fees. But whether that cost is worth it depends entirely on your company.
If you’re looking to outsource your warehouse storage, packing, shipping, and customer service and have the cash to do so, FBA may be a great solution for your business. If you’re a smaller seller just starting out and are comfortable fulfilling your own online orders, skip the fees and stick it out as a Fulfilled By Merchant seller as long as you can.
Efficient bookkeeping relies on efficient systems, and one of the most important systems you can put in place is your SKU naming conventions. We recommend naming SKUs as follows:
Read more about naming SKUs on the blog:
How to Name Your SKUs
Every business deals with debt, and understanding how your debt strategy can affect your profitability can be the difference between a struggling e-commerce business and a booming one.
Our series on SKUs and Your Debt Strategy breaks down the importance of understanding PAG, making CEO-level decisions about your product line, and calculating your inventory turnover rate.
PAG and Profitability
Spotting Underperforming SKUs
Understanding ROII and Inventory Turns
PAG, or Post-Advertising Gross, is the metric that reveals how much you’ve made in profit after accounting for ad spend. You can calculate PAG with the following equations:
Gross Profit – Advertising Expenses = PAG
Check out this post in our SKUs and Debt Strategy series about how PAG can help you spot underperforming SKUs:
PAG and Profitability
A CFO is the executive in charge of making financial decisions for a business. Most CFOs are in-house employees of said company, collecting a salary and benefits, which can be a tough ask for fledgling e-commerce companies.
Fractional CFOs are not employees; they work on a contract that promises their advisory services at a certain frequency and generally cost less than a full-time salaried employee.
A highly-qualified fractional CFO costs an average of $5,000-7,000 per month for a mid-sized e-commerce business, though there are several factors that may affect pricing, including the quality of your accounting and your preferred frequency of communication.
Read more about the cost and benefits of a fractional CFO on the blog:
How much will a fractional CFO cost your e-commerce business?
On average, a clean up project that involves reconciling past accounts, creating investor documents, and setting up automations costs a total of $500-$5,000. For recurring bookkeeping, you can expect to pay anywhere between $600 and $6,000 per month, depending on account complexity and accessibility.
Overall, we recommend that your accounting budget not take up more than 3% of your total monthly sales. This puts you in the sweet spot for outsourcing – sellers who are too small to outsource should take a DIY approach to their bookkeeping to save money, and enterprise sellers making over $1 million in sales per month are most likely dealing with accounts complex enough to hire their own in-house accounting team.
What does it take to do e-commerce accounting correctly?
What drives the price of an outsourced service?
How should you optimize your business for outsourcing?
How much should you expect to pay for an e-commerce accounting service?
As a small inventory-based business that is more than likely strapped for cash, you’ll want to avoid taking out a loan until absolutely necessary. In this post about when to consider getting a loan, we suggest a few things to try before approaching lenders:
- Is there a way you can crowdsource funding for your product, such as Kickstarter or Indiegogo?
- Do you have a solid relationship with your supplier that might allow you to negotiate better terms for debt repayment?
- Do all of your products have a fairly high inventory turnover rate, allowing you to profit off of them more times per year?
If you’ve exhausted each of these possibilities, it’s probably time to take on some debt.
Overhead comprises any spending your business does to sell a product that is NOT ad spending or COGS. Overhead is made up of many small categories that add up to a large portion of your overall spending – and Seller Accountant recommends that no category make up more than 1-2% of your expenses.
If you’re finding that one area, such as office space rental or software subscriptions, is eating up your profits, it’s time to look at those expenses and see where you might be able to cut costs.
Seller Accountant is a Quickbooks firm, and we exclusively use Quickbooks Online with all of our clients.
The other most popular accounting software for small businesses is Xero, and while the two function similarly, we recommend finding a Xero-focused firm if that’s the platform you prefer to use.
If you’re not happy with your current system, avoid the sunk cost fallacy and be open to switching systems if your accounting team prefers a specific one. However, if you’re happy with your software, it would benefit you more to find a firm that already uses that system rather than reinvent the wheel with your accounting.
Read more about accounting software options on the blog:
Which system is right for your e-commerce accounting?
Should you change accounting systems to work with a different firm?
Whether you’re looking to sell in the near future or not, it’s smart to have an idea of what your business is worth to a potential buyer. For a detailed look into the appraisal process, check out our blog series on Valuing Your E-Commerce Business:
The First Steps: SDE, Add-Backs, and Multiples
Tips & Tricks from High Value Deals
It’s exciting to think of yourself as the owner of a legally incorporated business, but depending on the size of your business, it might be more cost-effective to wait until you’ve seen some growth.
If you’re not sure whether it’s worth it to incorporate, try the “hobby test“: is your business low volume, netting a very small profit, or acting as an intermittent side project? If the answer to any of those questions is “yes,” you can most likely wait to incorporate as an LLC.
If you’ve passed the hobby test and are still on the fence about registering your business, know that becoming an LLC can help you legitimize your business for approaching lenders, cover your business for legal liability, and make tax filing easier.
Read more about incorporating as an LLC on the blog:
Should you incorporate as an LLC?
Both the payout schedule and the inventory buying rate affect the length of the e-commerce cash cycle – simply put, e-commerce brand owners pay for their inventory before they’ve made a sale, and then don’t receive the money from those sales until weeks or sometimes months later. This makes the turnaround between COGS spending and revenue seem longer than the average business model.
If you’re looking to relieve the stressors of a longer cash cycle, keep an eye on your inventory management, and try to negotiate more frequent payouts to keep funds coming in on a more timely basis.
Read more about the e-commerce cash cycle on the blog:
Managing the E-Commerce Cash Cycle
Tyler’s Tips: Understanding the E-Commerce Cash Cycle
Owning any type of business is a challenge, but e-commerce poses a unique set of challenges and so does e-commerce accounting. You can boil these challenges down to a top five:
- Sales tax
- Inventory management
- Amazon fees
- Transaction volume
- Refunds and returns
To read more detailed a explanation on why your e-commerce business needs a specialized accounting firm to handle your bookkeeping, check out our blog post, “What makes e-commerce accounting challenging?“
We’ve worked with all kinds of Amazon and e-commerce sellers over the years, and both the successful and unsuccessfully ones have been in danger of making these five mistakes.
- Concentrating on sales over net profit
- Expanding inappropriately
- Having a shortage of capital
- Forgetting about taxes
- Ignoring the importance of accounting
Hear more from Seller Accountant CEO Tyler Jefcoat about these e-commerce pitfalls and how to avoid them in our blog post, “5 Financial Mistakes Amazon Sellers Make.”
KPIs, or Key Performance Indicators, are the metrics that your business tracks to measure profitability and the health of your brand.
There are hundreds of KPIs your business can pay attention to, including PAG, product development, return on ad spend, developing sales channels, and lifetime customer value ratio. However, depending on which type of business you’re running – white label arbitrage, supply chain arbitrage, private label, or D2C – different KPIs will be more or less important for you to track.
No matter what kind of business you own, every owner should track their ROWC, or Return on Working Capital. Simply put, your ROWC is your profit x your sales velocity: the quicker you sell your inventory, the more times you get to reuse the same capital each year to generate profit. ROWC tells you whether you’re investing your money in the right place, inventory-wise, which is an important metric for any business to measure.
Read more about KPIs on the blog:
What KPIs should your brand measure?
Cash basis and accrual basis accounting are the two main accounting systems you’ll encounter when trying to clean up your books, and though they both track spending and earning, accrual accounting is the better choice for e-commerce.
Put simply, cash basis accounting tracks transactions when money exchanges hands, regardless of when a product or service was received. Accrual basis accounting records transactions when the good or service was exchanged, regardless of whether the money has transferred or not, much like filling out a checkbook ledger before the person receiving the check cashes it.
Accrual accounting keeps better track of a business’s funds by lining up expenses and providing better visibility into gross profit; Seller Accountant prefers accrual accounting as a firm of bookkeeping professionals.
Read more about cash vs. accrual accounting on the blog:
[VIDEO] Tyler’s Tips: Freedom Through Visibility and Accrual Accounting
Cash Vs. Accrual: Inventory and Tariffs
The most important question to ask yourself when choosing a sales channel is “how brandable is my product?” Generally, any highly commoditized product will be better off on a marketplace like Amazon or Walmart while something more unique to your brand can see more success selling D2C on a platform like Shopify.
Whichever you platform you decide on for your product, choosing a sales channel is a lot like balancing a three-legged stool: the three pillars of Working Capital, Sourcing, and Selling need to be balanced for the business to stand on its feet. If you take a risk in one area, you’ve got to balance it out in the other two.
Read more about sales channels on the blog:
The Most Profitable Sales Channel for Your Product